The condition under which a cartel can maintain its stability is that:
A)the barriers to entry should be relaxed.
B)an identical product should be produced by the colluding firms.
C)there should be a large number of firms in the market.
D)there should be legal barriers to share agreements.
E)the products of the colluding firms should be highly differentiated.

Question

Quizplus · Accepted Answer

For a cartel to maintain its stability, the colluding firms must produce an identical product. This ensures that they do not engage in price competition or product differentiation to gain an advantage over each other. By producing an identical product, they can easily maintain their agreed-upon pricing and production levels, as well as prevent new entrants from disrupting the market by offering a similar product at a lower price. Relaxing barriers to entry (A), having a large number of firms in the market (C), and having legal barriers to share agreements (D) can all make it difficult for a cartel to maintain its stability. Highly differentiated products (E) can also make it difficult for a cartel to maintain its stability, as firms may compete on factors other than price, making it difficult to maintain price collusion.

The Condition Under Which a Cartel Can Maintain Its Stability